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October 10, 2008

How scared should you be?

I've become addicted to NPR's Planet Money podcast  economic news for financial ignoramuses like myself. Last week, the PM team explained why the best way to know how much trouble we're in is to ignore the plunging stock market and keep your on the TED spread.

The spread measures the difference between the interest rate the U.S. government would give you to borrow money and what banks would give you... The idea behind the spread is that if you have money that you're willing to lend and you want to get some interest back, then the safest thing you can do is lend it to the U.S. government, Davidson says. Historically, large banks have been seen as almost as safe as the U.S. government. And for much of this decade, that was reflected in an extremely low TED spread rate that remained around 0.2.

As of this morning, that number is 4.51. You'll want to bookmark that link, and, for good measure, the rate of the three month treasury bond itself. If that number goes up, it means banks are engaging in the normal process of lending and borrowing money. If it goes down, they're hiding their money under the government mattress. A month ago 3 month T bonds T-bills were at 1.58. Today, they're at 0.18.